Leveraging Indian aid for cyclone-hit Sri Lanka

On December 23, 2025, India’s External Affairs Minister S. Jaishankar held discussions in Colombo with Sri Lanka’s President Anura Kumara Dissanayake on relief and reconstruction efforts from Cyclone Ditwah. The high-level visit led to tangible outcomes under India’s Neighbourhood First Policy. He announced an Indian reconstruction aid package of $450 million to Sri Lanka consisting of $100 million in grants and $350 in concessional loans. The package is on top of the timely humanitarian Indian aid efforts in the aftermath of Cyclone Ditwah including helicopters from INS Vikrant to help with search and rescue operations in flood affected areas. India was also the first aid responder to Sri Lanka following its sovereign default and economic crisis in April 2022.

Before Cyclone Ditwah hit, the Sri Lankan economy was in recovery mode. It marked a successful first year in office of President Dissanayake’s left wing National Peoples Power (NPP) government. Data for end November 2025 show that Sri Lanka’s GDP grew by 5.4% in the third quarter of 2025 (up from 4.9% in the second quarter), year on year inflation fell to 2.4% and foreign currency reserves rose to $5.9 billion. However, estimated income poverty still affects a quarter of the population of 23 million and levels of child malnutrition remain high – stains on a country once reputed as a basic human need’s success story. As early as the 1970s, Sri Lanka had high achievements in health and education compared to many other developing countries.

Nonetheless, this is a notable turnaround from the worst economic contraction and inflationary spiral in Sri Lanka’s post-independence history, following an external debt default in 2022. A $ 2.9 billion, seventeenth International Monetary Fund (IMF) programme since 2023, $4 billion in emergency aid from India, and prudent monetary policy by the Central Bank of Sri Lanka have underpinned the recovery. The NPP government took the pragmatic decision to continue with the demanding revenue-based fiscal consolidation IMF programme despite the NPP having previously campaigned for renegotiation of its terms. The NPP government also initiated campaigns against narcotic drugs and corruption as a key part of its mandate, though these efforts have attracted some political criticism. One high profile incident involves the arrest and remand of former President Ranil Wickremasinghe on August 22 for allegedly misusing public funds for a trip to the UK while in office.

The economic recovery has encouraged the NPP government to revert to its welfare-oriented mandate alongside the IMF programme in the 2026 national budget presented to Parliament on November 7. This year’s budget theme, ‘Steady and Strong: Committing to Fiscal Discipline for a Resilient Economy’, largely supports the IMF’s path of revenue-based fiscal consolidation. It targets a primary surplus of 2.5% of GDP, total government revenue of 15.4% of GDP, and an overall fiscal deficit of 5.1% of GDP for 2026. However, the budget’s growth target of about 7% in 2026 appears ambitious given the IMF’s more conservative projection of half that at 3.1%, the country’s moderate historical growth performance and the uncertain global economic environment.

Crucially, due to the government’s success in raising the tax-to-GDP ratio to an estimated 15.4% in late 2025 (up from 8.2% in 2022) through widening the tax base and revenue administration reforms and significant under-expenditure investment, the budget also gives political relief for the NPP’s base. Important provisions include allocations for building new homes for low-income families, investment in irrigation infrastructure vital for agricultural development, salary increases for public servants, creation of 75,000 new public sector jobs and importing double-cab vehicles for MPs.

Not surprisingly, Cyclone Ditawah has put a serious dampener on Sri Lanka’s rosy post-budget economic outlook. Between late November and early December, Cylone Ditwah brought heavy rains, floods and landslides to Sri Lanka causing extensive deaths and damage across the country. On December 11, The UN in Sri Lanka reported that nearly 10% of Sri Lanka’s population were affected, with over 600 people died or missing to date. More than 91,000 homes have been damaged or destroyed. On December 17, the World Bank estimated the total damage from Cylone Ditwah at $4.1 billion or about 4% of Sri Lanka’s total GDP. This is probably the worst natural disaster in Sri Lanka’s history.

The NPP government has appealed for emergency foreign aid (including a $200 million IMF Rapid Financing Instrument), set up a Rebuild Sri Lanka Fund and appointed a management committee for the Fund. But the composition and gender balance of the management committee of the fund, made up of only senior officials and corporate leaders, has drawn political criticism. So has the lack of early warning to the population of the path of Cyclone Ditwah, slow distribution of foreign aid to the worst affected areas of the country and small financial flows into the Fund.

Although it is premature to assess the economic hit of Cyclone Ditwah on Sri Lanka’s economic outlook in 2026, a riskier economic scenario is expected linked to devastated agriculture, damaged infrastructure, disruptions to tea and garment exports, increased import needs and a strained the fiscal deficit with reconstruction costs. To mitigate economic risks and to build back better, the NPP government should address three key policy priorities.

First, the Rebuild Sri Lanka Fund needs a costed post-Cyclone Ditwah reconstruction implementation strategy. This can be developed in partnership with the World Bank, the Asian Development Bank and the Asian Infrastructure Investment Bank to ensure international monitoring and leveraging of multilateral development bank resources with some infrastructure projects done as public private sector partnerships (PPP) to complement gaps in state capacity. This plan should include emphasis on early warning systems; disaster resilient infrastructure in roads, railways, energy and housing sectors; and capacity building.

Second, rather than simply appealing for foreign aid, which is typical in natural disaster situations, the NPP government should use available national resources to upscale relief efforts including deploying the large domestic resources available due to under-spend on the capital budget which is being held as special deposit accounts in state banks. A proportion of foreign reserves should also be used to import basic food and medicine.

Third, a comprehensive growth plan is needed to ensure a smooth pathway for Sri Lanka to move from the present IMF stabilisation/recovery phase to transformative growth. The focus should be ensuring macroeconomic stability, global supply chain integration, improved factor markets, poverty reduction and consensus building to capitalise on opportunities in tourism, the digital economy and niche manufacturing.

India can support Sri Lanka in realising these priorities, thereby leveraging the Indian aid package announced during Minister Jaishanker’s visit. For instance, Indian business can readily ramp up food and medicine exports to Sri Lanka and further regional trade. India can partner with multilateral development banks to manage the costed post-Cyclone Ditwah reconstruction implementation strategy and Indian business can participate in PPP infrastructure projects on a turnkey basis.
Finally, India can share its experience of implementing gradual economic reforms and policy planning under Niti Ayog to support Sri Lanka’s relief and reconstruction efforts. Continuing Indian aid engagement in Sri Lanka will enhance India’s reputation as a reliable development partner and regional power in uncertain global times.

Ganeshan Wignaraja is the Professorial Fellow for Economics & Trade at Gateway House and a Visiting Fellow at ODI Global, London.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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